Fixed Deposit (FD) products offered by banks are generally considered safe. However, other than banks, organisations such as NBFCs (Non-Banking Financial Companies) and corporates also seek deposits. While the nature of the product remains the same in both cases, there are a few differences from regulatory and risk perspectives. Here are key factors to note before investing in NBFC or corporate deposits.
Fixed deposits are offered by both banks and NBFCs/Corporates. NBFCs cannot offer savings accounts or demand deposits. For onward lending, they raise funds via fixed deposits. It keeps their business operations running. Corporates accept deposits to run their business and consider them as debt. NBFCs have limited RBI control and other corporates have no RBI control but are regulated by Ministry of Corporate Affairs (MCA) .
RBI prescribes the maximum interest that can be offered by NBFCs from time to time. Currently, the limit is 12.5 per cent a year. The minimum period of deposits they can offer is 12 months and maximum tenure of 60 months. RBI allows only the NBFCs registered with it to raise funds. NBFC and corporate deposits must carry a credit rating. And only firms with investment grade rating can accept deposits up to 1.5 times of their net owned funds.
Are these deposits safe?
RBI has mandated that the NBFCs registered and authorised by them should have an investment grade rating. Rating agencies measure and check the ability and willingness of the NBFC or corporate to return the principal amount and service the interest during the tenure. RBI regularly publishes on its website the list of NBFCs that hold a valid Certificate of Registration for accepting deposits.
Investors must also remember that only bank deposits have DICGC (Deposit Insurance and Credit Guarantee corporation) coverage of ₹5 lakh. In case of any defaults or if there is a bank failure, your deposits and account balances totalling up to ₹5 lakh are safe. But in the case of NBFCs or corporates, there is no insurance cover on your deposits and there is no guarantee that the depositor’s money will be returned.
What should depositors do?
Companies registered under the Companies Act 1956 can also solicit deposits. Earlier, corporates did not require credit rating for raising deposits. Hence, many times, their creditworthiness wasn’t known. However, in the Companies Act 2013, credit rating was made compulsory for companies. Other criteria included minimum networth, additional safeguards, etc. Depositors must be aware that higher the interest rate being offered, the higher the risk involved. Depositors must consider the credit rating, financial strength of the company and the management. It is advisable that depositors only deposit with entities that carry AAA rating. Depositors can also visit here to check if the NBFC has been barred from accepting deposits.